Hello everyone. My wife and I will be getting back some money late this year that we lent to a family member. Approximately $25,000. I have a question as to whether the following is a wise investment of the money.

We live in an area where single family home rentals are few and very sought after. Most rentals in this area are large apartment complexes. Rent for a single family home goes for about $1 a square foot/month. We could use the $25,000 as a down payment to purchase an approximately 1,200 to 1,300 square foot single family home in either the 2nd or 3rd best school district in our area. These properties rent quickly to young small families and stay rented. I calculate that after mortgage, taxes and insurance, we could stand to profit around $500/month off of the rent of the home. Does this sound like a wise investment for the $25,000 or do you think there are better options? Thanks!

Fri Jul 12, 2013 1:59 pm

littleroc02usModerator

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Is Landlording something you've been dreaming about doing for years or are you envisioning more of an investment that is long term? The reason I ask is renting isn't as simple as collecting checks. I am a handyman for a couple rentals and I get calls at different times of the day and week which can be a hassle. Plus when the water heater breaks and your the owner you'll need to cough up the money out of pocket. My brother in law bought a rental in Minneapolis for me to take care of and he won't make a profit in his first year of ownership, because the repairs have been numerous. Think about why you want to landlord and if it isn't your cup of tea, then maybe look into long term investing because 20k @ 8% for 30 years is 200k if you don't add anything else.

Risk comes from not knowing what you're doing. (Warren Buffet)

Fri Jul 12, 2013 3:08 pm

coasterSenior Advisor

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Your expenses will be considerably more than mortgage, taxes and insurance, so your net cash flow (profit would also include your capital gain in the property) will most definitely not be the $500 a month you've calculated; you might want to recalculate that including maintenance, improvements, *liability* insurance, lost rent, advertising, etc.

But....it seems you've identified a need / market demand where there is a lack of supply, and that's the first step toward a successful investment. So, take the above post in mind, and if you really want to be a landlord, then I think you've spotted a good opportunity to get a start in that career.

Best wishes and good luck.

~Tim~

Fri Jul 12, 2013 3:25 pm

oldguySenior Member

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quote: I calculate that after mortgage, taxes and insurance, we could stand to profit around $500/month off of the rent of the home.

Are you are looking at a $125,000 house with a $100,000 mortgage? Non-owner-occupied loans have about a 5.5% interest rate right now (about 1.5% more than OwnerOcc). If the profit is $500/m, that will add about $1200/yr to your income tax bills. But your depreciation schedule will get you about a $3600/yr depreciation write-off, that saves about $700/yr for you. (Note: be sure to file that every year, when you sell the IRS will bill you for depreciation even if you don't claim it).

I'm a landlord, sounds like you have identified a good region, one that could make money if the value of the houses appreciate. But it's not a hobby, you have to learn the Laws, tenant/landlord rights. Maximum deposit laws, tax laws, eviction laws, etc.

And the First Rule of landlording - don't rent to acquaintances, friends, co-workers, co-workers kids, and never ever to a relative - you need a formal arm's length agreement with a stranger. And never allow a enter to do work for you in lieu of rent. They seem like simple rules but nearly every landlord has fallen into those traps more than once.

Fri Jul 12, 2013 4:51 pm

coasterSenior Advisor

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Ah, yes ... depreciation on an investment property ... as a tax deduction to figure into the net-net ... great call!! Thanks!!

There ya go, makoman. You just stick around here and this oldguy will teach you everything you need to know about landlording.

~Tim~

Sat Jul 13, 2013 4:48 am

Guppy2Contributing Member

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Sorry but the first thing you should worry is if you can get your "$25,000" back from your family member.

Thu Aug 08, 2013 6:58 am

BrianaWalkerNew Member

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Real estate will be the best investing option according to me. It have great ROI and security of attaining a good amount of profit.

Wed Aug 14, 2013 12:08 pm

CandaceKroslakNew Member

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I think real estate is one of the best and smart investment because rate of interest is high and one will never regret after investing in it. But before investing in it one must have knowledge about various facts related with it.

Thu Aug 22, 2013 5:47 am

Natalia SmithMember

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There are various alternative in which you can invest. I will suggest you real estate. Real estate is one of the smart and lucrative investment. One will never regret after investing in it as ROI is high. But before investing in it you must have knowledge about various fact. For that you can take help of real estate agent.

Mon Dec 23, 2013 8:27 am

jevananuragNew Member

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In these days, Many of them are investing their money in real estate because it is the most profitable source of investment money and get the profitable results in a very less time.